integrated trading and clearing (itac) working group session...2015 working group (wg) schedule date...

Integrated Trading and Clearing (ITaC) Working Group Session

21 September 2015

Agenda

• ITaC User Readiness Timeline and Diagrams

• Pre Trade Risk Management

• Post Trade Risk Monitoring

• Short break

• Post Trade Risk Management

• Margining

• Methodology

• Approach

• Margin requirements

• J-SPAN methodology step by step walkthrough (replication)

2

Proposed ITaC phases

• The programme consists of 2 Projects

• Project 1:

• Phase 1a: Equity Market upgrade for trading only

o Targeting Q3 2016 (dependent on T+3 implementation)

• Phase 1b: Equity Derivatives Market

o Targeting Q2/3 2017

• Phase 1c: Currency Derivatives Market

o Targeting 2 months after Phase 1b implementation

• Project 2: Commodity Derivatives Market, Interest Rate Derivatives and Bonds Markets

3

2015 Working Group (WG) Schedule

Date Time Status

Tues, 12 May 2015 11h00 – 13h00 SAST Complete

Mon, 18 May 2015 10h00 – 12h00 SAST Complete

Thurs, 28 May 2015 10h00 – 12h00 SAST Combined into 3 June

Wed, 3 June 2015 10h00 – 12h00 SAST Complete

Wed, 1 July 2015 10h00 – 12h00 SAST Combine with/into 8 July

Wed, 8 July 2015 10h00 – 12h00 SAST Complete

Wed, 15 July 2015 10h00 – 12h00 SAST Complete

Wed, 5 Aug 2015 10h00 – 12h00 SAST Combine with/into 24 Aug

Fri, 21 Aug 2015 11h00 – 13h00 SAST Complete (CT checkpoint)

Mon, 24 Aug 2015 11h00 – 13h00 SAST Complete

Mon, 21 Sept 2015 10h00 – 12h00 SAST In Progress

Mon, 19 Oct 2015 10h00 – 12h00 SAST Due to Eco-mobility festival combined into Nov WG

Wed, 18 Nov 2015 10h00 – 12h00 SAST On track

• Proposed 2015 WG Schedule

4

5

Trading, Clearing and Information Systems All Markets – High-level

REFERENCE, EOD & OTHER

DATA

Trading Member

ORDER & TRADE MANAGEMENT

GATEWAYS

MARKET DATA GATEWAYS

Information Subscribers

ALL MARKETS ALL MARKETS

Information Delivery Portal

(IDP) (FTP)

Reference Data, Statistics & other

ALL MARKETS

Full Depth (MITCH) Throttled & Un-throttled

EQUITY

Indices (FIX)

News (FIX)

LvL1 (FIX)

DERIVATIVES BONDS &

INTEREST RATE

LvL1 (MITCH)

Post Trade (FIX)

DEAL MANAGEMENT &

CLEARING

ALL MARKETS Trading (Native)

Drop Copy (FIX)

EQUITY

Trading (FIX)

Clearing Member

Deal Mgmt (EMAPI)

5

Post Trade Risk Monitoring

Collateral Mgmt

Clearing and Settlement

Margin Methodologies

JSE Downstream

Ref. Data

Equity Trading System

Trading System

Information System

Post Trade

Trading Services

Providers (TSPs)

Order Management Gateways

Trading GW

(Native)

Drop Copy GW

(FIX)

Trading GW (FIX)

Market Data Gateways

LvL1 (FIX)

Full Depth

(MITCH Throttled)


Reference Data

(FTP)

Indices (FIX)

News (FIX)

FTSE

JSE SENS

Post Trade

Post Trade

GW (FIX)

JSE Downstream

Apps

Surveillance

Real Time Surveillance

Trades Indices

Indices News Trades, BBO, Stats

etc

Trading GW

Colocation

Full Depth

(MITCH Un-

throttled)

Un-throttled

ITCH

Low

Latency

TRD

Trading and Information System Current Equity Market

6

7

Trading and Information Systems High Level Proposed Derivatives Solution

• There will be a set of Market Data Gateways for Equity Derivatives and a set of Gateways for Currency Derivatives • Additional market data gateways will be introduced at a later stage for Commodity Derivatives. • Interest Rate market data will be disseminated via the same gateways as Currency Derivatives

Ref. Data

Derivatives Trading System

Trading System

Information System

Post Trade

JSE Members

Order Management Gateways

Trading Gateway (Native)

Drop Copy Gateway

(FIX)

*Market Data Gateways

MDG Level 1

(MITCH)

MDG Level 2

(MITCH) Throttled


Reference Data (FTP via IDP)

Post Trade

Post Trade

Gateway (FIX)

JSE Downstream Systems

Real Time Surveillance

MDG Level 2

(MITCH) Un-Throttled

Trading Gateway

Colocation

(Native)

* 7

Post Trade Interfaces High Level Proposed Solution

CLEARING SYSTEM

Deal Management, Clearing & Back Office Front Ends/API Solutions

INFORMATION DELIVERY PORTAL

(IDP) (FTP) TRADING SYSTEM

Post Trade G/W

Drop Copy G/W

Market Data G/W

Deal Management & Clearing

G/W (EMAPI)

Open Interest (periodic) Live Prices

Other Market Data

Orders (COB)

Trade and Position updates

Deal Management

New contracts intraday

Client Maintenance

Intraday Risk Monitoring

Collateral Mgmt

EOD Balancing

Trades (COB &

Reported)

Clearing Ref Data

MTMs, Rates

Vol surfaces

Fees Invoice

Fee Structures

Daily A/c Summary

Opening Positions

Trades

Open Interest

Monitoring of trading activity

8

Clearing & Risk Management

Summary of Clearing Topics Covered To-Date

Margin methodologies

Post trade (intraday) risk

monitoring

Collateral management

Default management

Settlement

Clearing overview & daily

lifecycle

Legend Covered

Covered at high level, further coverage planned

Not yet covered Covered today

• Post-trade functions • Intraday & EOD

processes

• Single EOD run • EOD balancing • Settlement of margins,

interest on cash, fees etc.

• Ad-hoc intraday margin call

• Securities & foreign currency collateral

• EOD & intraday processes

• J-SPAN • Margin add-ons • HistVaR

• Setting of intraday exposure limits

• Exposure updates and alerts

• Client default • Trading Member

default • Clearing Member

default

9

Agenda




• Short break


• Margining

• Methodology

• Approach



10

Pre Trade Risk Management Principles and Considerations

• Comprehensive review of all existing controls which highlighted that certain controls are not effective and implemented at the wrong level

• Consideration of what pre trade controls are required was factored against the need for alignment with best practice and an appropriate balance of:

• Protecting market integrity

• Ensuring market quality

• Providing user flexibility

• Consideration of market activity e.g. On Book, RFQ, Off Book

• Members taking more responsibility for risk management controls

• Minimising administration overhead

• Enabling competitive advantage for software providers to differentiate their service offerings to JSE clients

• Controls will reside at 3 levels

• Trading Member

• Clearing Member

• Exchange

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12

Pre Trade Risk Management Risk Controls – High Level Categories

EXCHANGE • Order Limits • Trades • Permissions • Price Movement Controls • Market Maker Protection • Proactive Monitoring & Alerting • Message Rate Throttling • Error Trade Principles • Cancel on Disconnect • JSE Rules and Directives • JSE Services Agreement • JSE Operational Requirements • Software Conformance • Accreditation

TRADING MEMBERS

• Orders • Trades • Permissions • Price Movements • Position Limits • Proactive

Monitoring • Trader Limits • Firm Limits • Message Rates • Obligations to

Clearing Member

CLEARING MEMBERS

• Drop Copy of Orders • Drop Copy of Trades • Ability to Cancel

Orders • Monitoring of

Trading Member Exposure

• Agreement with Trading Members and their Obligations to Clearing Member

Clearing Member to Trading Members agreement with risk limits and obligations

13

Pre Trade Risk Management Risk Controls – Trading Members

Trading Member Controls defined within trading frontend solutions • Pre trade quantity and value limits per trader • Pre trade quantity and value limits per order • Order price monitoring for abnormal price movements • Trader limits per individual order and reported trade size limits at

instrument level • Intra day and overall position limit management • Proactive monitoring of automated order entry applications or

client applications • Appropriate testing of automated applications by trading members

prior to go live in production • Management of order message rate submitted by trading front-end

to trading system • Ensuring limits imposed by Clearing Member are implemented in

applications and front ends

TRADING MEMBERS

• Orders • Trades • Permissions • Price Movements • Position Limits • Proactive

Monitoring • Trader Limits • Firm Limits • Message Rates • Obligations to

Clearing Member

14

Pre Trade Risk Management Risk Controls - Exchange

EXCHANGE • Order Limits • Trades • Permissions • Price Movement

Controls • Market Maker

Protection • Proactive Monitoring &

Alerting • Message Rate

Throttling • Error Trade Principles • Cancel on Disconnect • JSE Rules and Directives • JSE Services Agreement • JSE Operational

Requirements • Software Conformance • Accreditation

Exchange Controls defined within the trading engine and gateways

• Market wide pre trade value and quantity limits on individual orders

• Pre trade price limits and circuit breakers at market , segment and instrument group level

• Pre trade price collars checks and controls

• Permissions set at member level per market

• Alert on Off Book Trade price band breach

• Message Throttle rate of input messages per second per Interface User ID (CompID)

• Suspend all or some Interface User IDs (CompIDs) on request of trading member

• Software conformance mandatory prior to application go live

• Certain protection controls for market makers

• Clear error trade policies with same day correction trade capability

• Clear order cancellation policies and ability to cancel stipulated orders on disconnect i.e. as defined when creating enablement

• JSE rules and directives will impose pre trade risk management obligations on trading members

• JSE Services Agreement (JSA) between JSE and trading member

• Other minimum requirements in JSE operational requirements

• Accreditation of Software Providers and Shared Infrastructure Providers (SIPs)

Pre Trade Risk Management Market Limits - Maximum Order Size/Value

• Maximum Order Size

• All orders entered by a Interface user ID (CompID) will be validated against the specified max order size

• If the submitted volume/quantity is greater than the specified parameter the order will be rejected

• Each side (buy and sell) of a quote* will be separately validated for the max order size

• Maximum Order Value

• All orders/quotes will be rejected if the order value is greater than the applicable max order value for the user

• The bid and the offer of a quote will be separately validated against this validation

• Bid side will be validated first

15

* A quote is a single messages used to generate a buy and sell order simultaneously

Pre Trade Risk Management Order Value Calculation for Derivatives

• When calculating the order value of un-priced orders entered during Regular Trading, Pause or CPX sessions, the price of the contra side best bid/offer will be considered as the price of the order

• If the contra-side of the order book is empty, the Dynamic Reference Price (DRP) of the instrument will be considered as the price of an un-priced order

• In absence of both the contra side best price and the DRP, the order will be accepted by the system without performing any validations

• When computing the order value of un-priced orders entered during auction call sessions, the indicative auction price available at the time of the order entry will be considered as the price of the order

• If the indicative auction price is unavailable, the DRP of the instrument will be considered as the price of the order

• In the absence of both the indicative auction price and the DRP, the order will be accepted by the system without performing the maximum order value validation

• The same will apply to parked orders undergoing election

16

Pre Trade Risk Management Permissions

• Trading Members will be permissioned at a market level for each Interface User ID (CompID) even though the following gateways will exist:

• Equity Market

• Equity Derivatives, Currency Derivatives and Interest Rates Markets

• Commodities and Bond Market

• Interface user IDs (CompIDs) will be assigned, created and permissioned by the JSE during the enablement process

• IP address validation will be performed by the system on connection and login

• An Interface User ID (CompID) for a trading member can be provided to a clearing member on behalf of the trading member to cancel orders in exceptional circumstances

• Trading and clearing members should however note the consequences of allowing this and accept accountability for it

17

Pre Trade Risk Management Market Maker Protection (MMP)

• Market maker protection (MMP)

• 5 types of protection limits available:

• Value Limit

• Volume Limit

• Fill Limit

• Value Delta Limit

• Volume Delta Limit

• Protection limits can be set up in various ways • Per Segment for all Instruments (Futures and Options)

• Per Segment for Futures or Options

• Per Underlying and All Instruments

• Per Underlying for Futures or Options

18


• Monitoring Protection Limits

• The system monitors whether any of the protection parameters of the particular user are breached for each of the executions that happen for the assigned instrument selection during the Monitoring Period

• If the particular instrument is assigned to the user via an underlying (or underlying + instrument definition), then any executions for this instrument or any other instrument with the same underlying (or underlying + instrument definition) within the same monitoring period causes the values being monitored to be updated

• If the particular instrument is assigned to the user via a segment (or segment + underlying), then any execution to this instrument or any other instrument in the same segment (or segment + instrument definition) within the same monitoring period causes the values being monitored to be updated

19


If during a monitoring period, the calculated protection values for a market maker for an assignment exceed any of the specified limits, then all orders/quotes for the particular user belonging to the following categories are automatically cancelled

• Instruments in the particular assignment

• E.g. If a protection limit is breached for a segment, the orders/quotes for all instruments belonging to the specified definition in that segment for the particular user are cancelled

• If a protection limit is breached for an assignment via an underlying, the orders/quotes for all instruments belonging to the specified definition with that underlying for the particular user are cancelled

• Instruments that have legs which belong in the particular assignment

• A market maker protection limit is set up by assigning ABC as the underlying and Options as the instrument definition

• Market Maker has active quotes for some of the options based on ABC

• Market Maker also submitted quotes for a strategy with ABC as a leg

• When the Volume limit of the Market Maker for ABC based options breaches, all his orders/quotes in ABC based options as well as strategy with those options as legs get cancelled

20


• This functionality is applicable to: • Orders, quotes submitted as single quotes as well as quotes submitted as mass quotes

• Implicit trades (i.e. leg trades) due to trades in synthetic instruments also count towards the limits

• Protection limits are evaluated only after each aggression. Hence, an aggressing order may take the actual exposure of the particular user beyond the specified threshold limits. However, on partially execution, the remaining quantity is cancelled at the end of the aggression without adding it to the order book

• If a threshold limit is exceeded for a market maker in the middle of an auction, the planned auction is completed and no orders/quotes are cancelled during the auction. Once the auction has completed and if there are any remaining quantities of orders/quotes belonging to the market maker, they are cancelled

• When an incoming (or aggressive) Quote of a Market Maker executes and breaches any MMP limits during an execution, the system cancels all relevant orders and quotes of the Market Maker including both the sides of the aggressive quote

21

Pre Trade Risk Management MMP Limit Types

• Value Limit

• Value Limit is the maximum gross value of the orders and quotes that are allowed to be executed within a monitoring period for the specified underlying, underlying + instrument definition, segment or segment + instrument definition

• Volume Limit

• Volume Limit is the maximum gross volume (i.e. size) of quotes that is allowed to be executed within a monitoring period for the specified underlying, underlying + instrument definition, segment or segment + instrument definition

22


• Fill Limit

• Fill Limit is the total number of executions that are allowed within the monitoring period for the specified underlying, underlying + instrument definition, segment or segment + instrument definition

• Volume Delta Limit – defined in absolute terms

• Applicable to Option Instruments

• Applicable to Futures Instruments

23


• Value Delta Limit – defined in absolute terms

• Applicable to Option Instruments

• Applicable to Futures Instruments

24

Pre Trade Risk Management Cancel on Disconnect/Logout

• Cancel on disconnect or logout

• Ability to allow users to cancel all open orders/quotes

• Option to exclude GTD/GTT orders

• Allows users to be confident that they are not sitting in a moving market whilst having no connectivity

• Will cancel all active orders

• Can be set up per order

• Field Cancel On Disconnect must be set to ‘YES’

• Disconnect delay

• Allows management of orders in case millisecond disconnects are experienced

25

Pre Trade Risk Management Cancel on Disconnect/Logout

• Combinations applicable in the Trading Engine

26

Enablement Setup:

Mass Cancel on Disconnect/Logout

User Activity:

User Specified Value in Order/Quote

Result:

Order/Quote Cancelled (YES/NO)

YES NO NO

NO NO NO

NO YES NO

YES YES YES

YES Not set NO

NO Not set NO

Pre Trade Risk Management Input Message Rate Throttling

• Ability to throttle message input rates

• Managed by the Exchange

• Forms part of the enablement process when Interface User IDs (CompIDs) are created per firm

• Set on a User Level i.e. Interface User IDs (CompID) level to limit a certain amount of messages that are entered within a second

• Inbound messages are received by the Gateway up to the limit set for the Interface User IDs (CompID ) e.g. 100 messages per second

27


• Any orders that are received that breach this limit within the same second will be rejected at the gateway level with a Reject Message (3)

• Users are advised to design systems with limits in mind as throttling should be considered before order entry occurs

• Set the message input rate to ensure it never breaches the Interface User ID (CompID) order rate

• Potential to have Interface User IDs (CompID) locked due to excessive breaching of the throttle rates

28


29

Pre Trade Risk Management Kill Switch Concept

• Disable access to trade (kill switch concept)

• JSE Market Operations can immediately disable access on an Interface User ID (CompID) level on instruction by Market Surveillance or the Trading Member

• Member can automatically log off all Interface User IDs (CompIDs) with one logout message

• JSE Market Operations can, upon request or as it deems fit, suspend any:

• User

• Trader

• Trader group or

• Trading Member (Firm)

30

Pre Trade Risk Management Price Bands on Off Book Trades

• Price Bands

• In the event that an Off Book Trade breaches a price band, an alert flag indicator (PbBreached) is sent on the TCR to the trading member and a notification of the trade is sent to the clearing member by the clearing system

• Once a price band is breached, JSE Market Operations and Surveillance are also notified of the trade via an alert

• JSE Surveillance may request transaction to be reversed or cancelled

31

Pre Trade Risk Management Circuit Breakers

• Circuit Breakers

• Two types of circuit breakers exist in the Trading System

• Static Reference Price Circuit Breaker - can be configured to refer the previous day's closing price or the last auction price

• Dynamic Reference Price Circuit Breaker - refers to last traded price

• The more restrictive limit will always take precedence

• These can be set to either percentage values or static values

• JSE will be implementing percentage values for all markets except for the commodities market where price limits will apply

• Applicable to all orders aggressing the order book with matching potential on a pre-execution basis

• Breaching orders trigger a volatility auction which will allow users to manage orders where no executions will take place

• Volatility Auctions will be subject to

• Price Monitoring Extensions or

• Market Order Extensions

32

Pre Trade Risk Management Circuit Breakers

33

Volatility Auctions - static and dynamic thresholds

Pre Trade Risk Management Price Monitoring/Protection - Proposed

• Execution limits

• Defined as a percentage or tick variation from the reference price of the instrument

• Different percentage/ticks can be set for market and limit orders

• Doesn’t affect the order, only controls the max/min price at which an order is executed

• Typically used to control adverse, drastic price movements

34

35

Pre Trade Risk Management Risk Controls – Clearing Members

CLEARING MEMBERS

• Drop copy of orders • Drop copy of trades • Ability to cancel

orders • Monitoring of

trading member exposure

• Agreement with Trading Members and their Obligations to Clearing Member

Clearing Member Controls

• Ability to receive drop copy of all orders per member

• Ability to receive drop copy of all trades per member

• An Interface User ID (CompID) for a trading member can be provided to a clearing member on behalf of the trading member to cancel orders in exceptional circumstances

• Clearing member to trading member agreements with clearly defined obligations per party and with specific reference to firm and trader trading limits

• Engagement with trading members on behalf of who they clear to ensure that trading members enforce necessary pre-trade risk controls

• Monitoring of trading member exposure through real time messaging from RTC

Agenda




• Short break


• Margining

• Methodology

• Approach



36

Post Trade Risk Monitoring Monitoring and Triggers

• Intraday Risk Monitoring • Risk information provided to Trading Members (TMs), Clearing Members (CMs)

and updated throughout the day

• Information available on EMAPI

• Initial Margin (IM), Additional Margin (AM), Variation Margin (VM), Collateral, Indicative Call

• IM: J-SPAN, Large Pos. Add-on, Liq. Period Add-on

• Aggregated for client, TM, CM

• Updated throughout the day as new prices become available and positions are updated

• Thresholds • A threshold can be set on the margin call of a client

• (IM + AM + VM) - Collateral vs. Risk Threshold

• Exposures breaching their threshold are highlighted

• JSE sets a global threshold

• CMs can set a more conservative threshold for their TM’s clients

• TMs can set a more conservative threshold for their clients

Client Level

Clearing Member

Trading Member

Client J-SPAN Liquidation Period Add-

on

Large Position Add-on

Settlement Margin

IM AM VM Collateral

Value Indicative

Call

AAA CM AAA TM AAA TM House 82 780 0 0 0 82 780 0 -16 507 557 100 000 -16 524 777

AAA CM AAA TM AAA TM BR1 439 700 25 000 0 35 000 499 700 0 558 317 499 700 558 317

CCC CM CCC TM CCC TM House 8 520 000 350 000 2 500 000 15 000 11 385 000 1 707 750 -2 869 199 9 200 000 1 023 551

CCC CM CCC TM CCC TM BR1 12 727 800 15 000 000 20 000 000 0 47 727 800 7 159 170 26 985 363 60 000 000 21 872 333

AAA CM AAA2 TM AAA2 TM House 59 200 0 15 000 0 74 200 0 37 338 100 000 11 538

AAA CM AAA TM AAA BR1 CL1 134 800 0 0 5 000 139 800 0 58 317 400 000 -201 883

BBB CM BBB TM BBB CL2 0 0 0 0 0 0 89 950 1 000 88 950

CCC CM CCC TM CCC TM CL1 46 620 0 0 0 46 620 6 993 26 985 363 50 000 26 988 976

DDD CM DDD TM DDD TM CL1 5 000 0 0 0 5 000 0 -47 500 0 -42 500

38

Clearing Member

Trading Member

J-SPAN Liquidation Period Add-

on


Settlement Margin

IM AM VM Collateral

Value Indicative

Call

AAA CM AAA TM 657 280 25 000 0 40 000 722 280 0 -15 890 922 999 700 -16 168 342

CCC CM CCC TM 21 294 420 15 350 000 22 500 000 15 000 59 159 420 8 873 913 51 101 526 69 250 000 49 884 859

AAA CM AAA2 TM 59 200 0 15 000 0 74 200 0 37 338 100 000 11 538

BBB CM BBB TM 0 0 0 0 0 0 89 950 1 000 88 950

DDD CM DDD TM 5 000 0 0 0 5 000 0 -47 500 0 -42 500

Clearing Member

J-SPAN Liquidation Period Add-

on


Settlement Margin

IM AM VM Collateral

Value Indicative

Call

AAA CM 716 480 25 000 15 000 40 000 796 480 0 -15 853 584 1 099 700 -16 156 804

CCC CM 21 294 420 15 350 000 22 500 000 15 000 59 159 420 8 873 913 51 101 526 69 250 000 49 884 859

BBB CM 0 0 0 0 0 0 89 950 1 000 88 950

DDD CM 5 000 0 0 0 5 000 0 -47 500 0 -42 500

Trading Member Level

Clearing Member Level

Intraday Risk Monitoring Example

Integrated Trading & Clearing (ITaC) Post Trade Risk Management

Short Break

Agenda




• Short break


• Margining

• Methodology

• Approach



40

Post Trade Risk Management Margining Approach

• Single margin run across all markets

• Allows the JSE to give margin off-set where appropriate

• Markets will be migrated onto ITaC in phases

• Equity Derivatives and Currency Derivatives targeting Q2/3 2017

• Interest Rate Derivatives, Commodities Derivatives and Cash Equity thereafter

41

Post Trade Risk Management Margin Requirements

• Initial Margin on go-live will be based on: • J-SPAN

• Minor changes on volatility skew & VSR

• Liquidation Period Add-on • Caters for positions that could take longer to liquidate than assumed under J-SPAN

• Large Exposure Add-on • Caters for losses that could exceed margin held for J-SPAN & Liquidation Period Add-on

• Later Historical VaR will be introduced • Hist VaR to replace J-SPAN at some point • Allows for more intuitive margin off-setting • Hist Var is Based on

• 1,000 volatility adjusted returns per underlying used to determine P&Ls

• Adjusted for • Vega Risk • Calendar Spread Risk

• Additional Margin charged by the CM is added to Initial Margin

42

Post Trade Risk Management Margin Replicating

All data required to replicate margin will be made available

• JSE Website – updated weekly

• J-SPAN Margin parameters

• IMR, CSMR, SSMR, VSMR, CSG, SSG • HistVaR Volatility Adjusted Return-array per underlying • Instrument Reference data

• IDP – updated daily • Settlement Prices • Rates • Risk Arrays • Instrument Reference Data • Parameters for Liquidation Period & Large Position Add-ons • Hist VaR P&L arrays

• Daily Margin Report • Contract-level details can be generated for all margin calculations if requested

43

Agenda




• Short break


• Margining

• Methodology

• Approach



44

Introduction

• Initial Margin (IM) is intended to cover the Variation Margin (VM) payments of defaulting entities, from the point of default to the point at which the portfolio is completely liquidated (or auctioned off)

• Account level IM is calculated centrally by the Clearing House. Clearers can, however, call for additional IM from their clients

• IM for JSE Clear is calculated through the a portfolio scanning methodology; J-SPAN

• Each futures contract has four J-SPAN parameters. These parameters are calculated in accordance with the JSE Clear’s risk tolerance, and are updated on a regular basis (typically fortnightly)

45

Reference Data

• The following instrument attributes are required by the J-SPAN framework:

• Class Spread Group (CSG): a group on futures that share the same underlying instrument, and where calendar spread offsets will be applicable. Each tradeable instrument (options inherit the CSGs of their futures) can belong to only one CSG

• Series Spread Group (SSG): a group of highly correlated CSGs. Series Spread Offsets are awarded when participants have long and short exposures in the same SSG. Each CSG can belong top only one CSG.

• Contract Size: a number used to convert the quoted futures price to the equivalent notional exposure

Example: ALSI Reference Data

Name Underlying Expiry CSG SSG Contract Size

Dec-15 ALSI J200 17-Dec-15 ALSI Equity Index 10

46

J-SPAN Parameters

• Initial Margin Requirement (IMR);

• Calendar Spread Margin Requirement (CSMR);.

• Series Spread Margin Requirement (SSMR);

• Volatility Scaling Range (VSR);

Example: ALSI Reference Data

Name Expiry IMR CSMR SSMR VSR

Dec-15 ALSI 17-Dec-15 30,000 2,000 2,500 3.5

47

Mark-to-Market (MtM) Data

• The following MtM data is required in order to replicate J-SPAN:

• Futures MtM prices

• Options ATM volatilites

• Option volatility surfaces

Example: ALSI Volatility Surface

Expiry/Moneydness 90% 95% 100% 105% 110%

17-Dec-15 4.2 2.4 0 -2.0 -3.3

17-Mar-16 5.1 3.1 0 -4.4 -5.6

15-Jun-16 6.0 4.5 0 -5.0 -7.2

15-Sep-16 7.7 5.7 0 -5.3 -7.6

48

The Risk Arrays

• A risk array is an array of instrument level profit and losses under a variety of Futures MtM and ATM vol scenarios

• A risk array is calculated for each tradable instrument

• The set of risk array scenarios are governed by three parameters:

• A vector depicting the extent to which the Futures MtM should be changed, relative to the IMR of the particular Future. This vector is referred to as the Futures Scenario Set (FSS)

• A vector depicting the extent to which the ATM volatility should be changed, relative to the VSR of the particular Future. This vector is referred to as the Volatility Scenario Set (VSS)

• A liquidation Period (LP) defining the date for which contracts are to be revalued

• The FSS, VSS and LP parameters are defined globally

Example:

FSS = [-1;-0.75;-0.5;-0.25;0,+0.25;+0.5;+0.75;+1], VSS = [-1,0,+2], LP = 2-days

49

Risk Array Example

Scenario ID Futures MTM Change ATM Vol Change PnL (Risk Array)

Scenario 1 Futures MtM + IMR × (−1) ATM Vol + VSR × (−1) - 30,000

Scenario 2 Futures MtM + IMR × (−0.75) ATM Vol + VSR × (−1) - 22,500

∶

Scenario 10 Futures MtM + IMR × (−1) ATM Vol + VSR × (0) - 30,000

Scenario 11 Futures MtM + IMR × (−0.75) ATM Vol + VSR × (0) - 22,500

∶

Scenario 19 Futures MtM + IMR × (−1) ATM Vol + VSR × (+2) - 30,000

Scenario 11 Futures MtM + IMR × (−0.75) ATM Vol + VSR × (+2) - 22,500

∶

Scenario 27 Futures MtM + IMR × (+1) ATM Vol + VSR × (+2) + 30,000

50

Position Level Risk Arrays and Initial Margin

• A position level risk array is obtained by multiplying each element in the instrument level risk array by the position in the particular instrument

• The position level risk array thus depicts the position level profit and losses under a variety of Futures MtM and ATM vol scenarios

• The Initial Margin (IM) on an outright position in single tradable instrument would be the absolute value of the smallest element in the position level risk array

• An expiry level risk array is obtaining by aggregating all position level risk arrays at an expiry, and CSG level

• The IM on a portfolio consisting of a position in a futures contract, and a set of positions in options on the same futures contract, with the same expiry date, will be the absolute value of the smallest element in the expiry level risk array

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Calendar Spread Margins

• The term “calendar spread” is often used to describe a transaction involving a long position in a futures contract on a particular underlying instrument, and a simultaneous short position in a futures contract on the same underlying, but for a different expiry date

• J-SPAN recognizes the risk reducing impact associated with having long and short exposures in different contracts in the same CSG by reducing the total amount of initial margin required against the net exposure. In particular, the total amount of initial margin on a calendar spread position involving two contracts (𝐴 and 𝐵) in the same CSG, is approximately calculated as follows:

𝐼𝑀𝐶𝑆𝐺 = 𝑃𝑜𝑠𝐴 × 𝐶𝑆𝑀𝑅𝐴 + 𝑃𝑜𝑠𝐵 × 𝐶𝑆𝑀𝑅𝐵 + 𝑃𝑜𝑠𝐴 × 𝐼𝑀𝑅𝐴 − 𝑃𝑜𝑠 × 𝐼𝑀𝑅𝐵

• If no calendar spread positions are associated with the particular CSG:

𝐼𝑀𝐶𝑆𝐺 = min (𝐸𝑥𝑝𝑖𝑟𝑦 𝐿𝑒𝑣𝑒𝑙 𝑅𝑖𝑠𝑘 𝐴𝑟𝑟𝑎𝑦)

𝐸𝑥𝑝𝑖𝑟𝑦 𝐷𝑎𝑡𝑒𝑠 ∈𝐶𝑆𝐺

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Series Spread Margins

• The term “series spread” is often used to describe a transaction involving a long and short positions in a futures contracts on underlying instruments which are highly correlated with one another

• J-SPAN recognizes the risk reducing impact associated with having long and short exposures in different contracts in the same SSG by reducing the total amount of initial margin required against the net exposure. In particular, the total amount of initial margin on a series spread position involving two contracts (𝐴 and 𝐵) in the same SSG, is approximately calculated as follows:

𝐼𝑀𝑆𝑆𝐺 = 𝑃𝑜𝑠𝐴 × 𝑆𝑆𝑀𝑅𝐴 + 𝑃𝑜𝑠𝐵 × 𝑆𝑆𝑀𝑅𝐵 + 𝑃𝑜𝑠𝐴 × 𝐼𝑀𝑅𝐴 − 𝑃𝑜𝑠 × 𝐼𝑀𝑅𝐵

• If no series spread position are associated with the particular CSG:

𝐼𝑀𝑆𝑆𝐺 = 𝐼𝑀𝐶𝑆𝐺𝐶𝑆𝐺 ∈ 𝑆𝑆𝐺

• The account level IM is then the sum of 𝐼𝑀𝑆𝑆𝐺 across all SSGs associated with the particular account

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integrated trading and clearing (itac) working group session...2015 working group (wg) schedule date...

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